The Indian hospitality sector presents a lucrative investment opportunity, yet hotel transactions often face significant hurdles. Several factors contribute to the complexity of closing deals, ranging from emotional attachments to financial and structural challenges. Here’s a deep dive into why hotel deals in India are so difficult to execute.
Senior Director – Capital Markets & Investment Services- Hospitality, Colliers Inda
In theory, acquiring a hotel at 12x EBITDA (equivalent to an 8.33% cap rate) would be ideal, but in practice, such deals rarely occur at that valuation
The Changing Landscape of Hotel Transactions
Five years ago, finding a hotel asset for sale in metro cities was relatively easy. Within a 5-10 km radius of any major city center, multiple hotels would typically be available on the market. However, the post-COVID era has transformed the hospitality industry.
- Unprecedented Demand & Occupancy: Hotels are now achieving record-high occupancy and profitability, with margins surpassing historical levels.
- Limited Availability of Quality Assets: With strong operational performance, owners are reluctant to sell, leading to a scarcity of good hotel assets in prime locations.
- Aggressive Expansion by Listed Players & Existing Owners: Large hospitality chains (Chalet, Juniper, Ventive, Chalet etc) and independent operators are actively seeking acquisitions to expand their portfolios, intensifying competition for available properties.
Key Challenges in Hotel Transactions
1. Emotional Attachment of Owners
Many hotel owners have a deep emotional connection to their properties, especially if they were involved in the development process. Even if the asset underperforms, the sentimental value makes them reluctant to sell, even when it makes financial sense to exit.
2. Unwillingness to Cut Losses
Hotels often require significant capital—first for construction and then to cover operational shortfalls. Many owners fund losses through other businesses rather than selling, hoping for a future turnaround. This “double dip” equity scenario keeps distressed assets off the market longer than necessary.
3. High Transaction Costs
Like other real estate assets, hotels attract steep stamp duties (5-7%) and additional fees, increasing the total cost by ~10%. This makes deals expensive and discourages potential buyers who must factor in these added expenses.
4. Unrealistic Seller Expectations
Some owners demand sky-high valuations based on replacement cost or future potential rather than current EBITDA multiples. This pricing mismatch discourages serious buyers and prolongs deal timelines.
5. Wide Gap Between Replacement Cost and EBITDA Multiples
In cases where land costs are high (e.g., prime locations or large parcels), the replacement value far exceeds the property’s income-generating ability (often capped at 12x EBITDA). This disconnect makes valuation difficult and deters investors seeking yield-based acquisitions.
Common Mistakes Buyers Make
1. Overreliance on Surface-Level Analysis
Buyers or their representatives sometimes judge deals based on presentations or past financials without deep diving into operational inefficiencies, market positioning, or owner motivations. This leads to mispriced offers or missed opportunities.
2. Ignoring Cost Rationalization & Revenue Enhancement
Many buyers fail to assess cost-cutting or revenue-boosting potential during initial evaluations, only discovering these levers during due diligence. Early identification could make marginal deals viable.
3. Underestimating Upside Potential
Struggling hotels often come to market due to mismanagement or outdated operations. Basing valuations solely on historical EBITDA ignores the upside from rebranding, operational improvements, or market recovery—leading to undervaluation or missed deals.
Conclusion
The Indian hotel transaction market has evolved dramatically post-COVID. While demand and profitability are at all-time highs, the supply of quality assets has tightened, making acquisitions highly competitive.
For sellers, this is an opportune time to unlock value, provided they price assets realistically. For buyers, success lies in thorough due diligence, creative deal structuring, and a keen eye for underutilized assets with rebranding or operational upside.
As the market continues to mature, bridging the gap between seller expectations and buyer willingness—while navigating high transaction costs—will be crucial for unlocking more deals in India’s dynamic hospitality sector.
